25 JUN 2018
When the 2008 global financial crisis shook the collective confidence in the financial banking system, regulators turned to valuation professional organizations to bring more clarity and regulation to financial reporting of valuations of businesses and intangible assets.
Determining fair value for something that can’t be seen or touched like a business or an intangible asset such as a brand/trade name or a patent requires the use of sophisticated financial models, various valuation approaches, analytical assumptions and professional judgement.
It was important to build a process that would make these valuations easier to understand for non-valuers and to ensure that all valuations include the appropriate documentation that can be verified by financial auditors and regulators. Regulators also questioned whether some of the individuals conducting fair value measurements were properly trained with the qualifications, experience and expertise required to make such complex judgements. The solution is a process that reduces risk by requiring professionals to pass a rigorous exam and undergo an annual review of their work.
Unlike tangible assets like property and buildings, intangible assets like a company’s reputation or recognizable logo requires a great deal of experience and professional judgement. Obviously, having Nike’s swish on a pair of running shoes has intrinsic value compared to even the same shoe without the logo. That logo guarantees a level of quality and craftmanship that customers trust but valuers must determine exactly what the logo would command in an open marketplace between a willing buyer and a willing seller.
Valuation professionals, specifically the business valuation professionals, who research and determine values for intangible assets like logos, haven’t been regulated by government and are not required to be licensed to practice like real property valuers. Many business valuation professionals were well educated and produce excellent work products however some were inexperienced or made decisions based on faulty research and analysis. Unfortunately, a profession is measured by its lowest common denominator.
To distinguish between the qualified and unqualified, the United States regulator, the U.S. Securities and Exchange Commission (SEC), have demanded that the the valuation profession to come up with standards to ensure all valuations were backed up with proper documentation to explain the reasoning behind the valuer’s judgements and conclusions. It is important that the profession be able to assure regulators and the public that even with assets as tricky to value such as intangibles, the valuers are following appropriate protocol and that there is solid research and documentation behind every valuation work product.
RICS joined the American Institute of CPAs (AICPA), the American Society of Appraisers (ASA), the Appraisal Foundation, the International Valuation Standards Council and many international accounting firms to come up with a framework to improve the quality, consistency and transparency of all valuations.
This new credential program, called the Certified in Entity and Intangible Valuations (CEIV), is based on the new Mandatory Performance Framework and will be added next to the base qualification to one of the professional bodies above. The uniqueness of this credential is its ongoing proactive risk-based quality assurance scheme to guide and enforce the behavior of the valuation profession and strengthen regulator confidence and public trust. RICS and our partners are working together to educate industry leaders in this new accreditation that sets the standard for the valuation profession.
This need was first identified in the US but it is a global issue with regulators in many countries expressing concern over the current lack of standardization in the valuation field. The global valuation industry is keeping a close eye on our progress in the US and if we’re successful, following CEIV practices will become the norm around the world.
19 September 2018
News & opinion
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9 August 2018